What is one possible price of capital-intensive goods (in terms of labor-intensive goods) that would make BOTH countries better off as the result of trade?
Suppose Country A can produce 200 tons of capital-intensive goods or 200 tons of labor-intensive goods in one day. Suppose Country B can produce 80 tons of capital-intensive goods or 160 tons of labor-intensive goods in one day.
What is one possible price of capital-intensive goods (in terms of labor-intensive goods) that would make BOTH countries better off as the result of trade?
In country A,
1 ton of capital-intensive goods =200/200 = 1 ton of labor intensive good
In country B,
1 ton of capital intensive good = 160/80 = 2 ton of labor intensive good
As country A has lower opportunity cost in the production of capital intensive good so
Country A has comparative advantage in capital intensive goods
And country B has comparative advantage in production of Labor intensive goods
So both will specialise according to their comparative advantage.
Step by step
Solved in 2 steps
